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Goldman and AIG

Posted by Larry Doyle on March 21, 2009 5:49 AM |

There has been extensive speculation that Goldman Sachs unjustifiably benefited from the weakness at AIG over the last 6 months. While conspiracy theorists can and will have a field day with this story, at its core I think Goldman did what any well run firm should always do — protect its shareholders.

While the stock values of Merrill Lynch, Morgan Stanley, and Bank of America flirted with total disaster, Goldman Sachs traded down but bottomed out at approximately $50 a share. That price does not strike me as indicative of a firm on the brink of bankruptcy. As Goldman now reveals, it had significant exposure to AIG but it also significantly hedged this exposure to AIG via other transactions. Thus, Goldman would have been negatively impacted by an AIG bankruptcy but not fatally impacted.

Should Goldman have taken a discount on payments it received from AIG? We may never know the details on this front. However, any publicly held company is responsible first and foremost to its shareholders. I do not begrudge the fact that Goldman Rejected Settling of AIG Trades at a Discount

Was Hank Paulson conflicted in his dealings between Goldman and AIG given his previous position at Goldman? Perhaps he was. Should he have recused himself? Perhaps. Did he knowingly side with Goldman at the expense of AIG and the American taxpayer? Nobody has provided any clearcut evidence of that.

Did Paulson, Geithner, and other Treasury and Federal Reserve officials view negotiating discounts on payments from AIG to Goldman and other counterparties as too unwieldy and problematic? Again, we will likely never know.

All this said, it is not the responsibility of Goldman Sachs to voluntarily offer discounts on contracts written in good faith between willing counterparties. Goldman is in the risk business. It seems to have prudently and properly managed its risk throughout this turmoil.

The burden should be on the government and AIG to negotiate discounts with its creditors. In the meantime, those creditors are beholden to their shareholders.

It’s called capitalism!!


P.S. After sleeping on this, I also believe it is not implausible that Wall Street pushed Geithner as Treasury Secretary and Schapiro as head of the SEC because they were easily controlled and manipulated. I have seen little to nothing to dissuade me of this opinion in the first 6 to 8 weeks of this administration.

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